Today’s farmers are profitable. According to the USDA, 5 of the all-time top-earning years in U.S. agriculture occurred in the last 7 years. While high input costs, global recession and other factors reduced farm profits by 20% in 2009, 2010 is expected to be a rebound year. Net farm income is forecast to be up 11.8%, or $6.7 billion, this year compared to 2009.
A plus for equipment dealers is the fact that interest rates are as low as we’ll probably ever see them. Those with good credit available may very well be able to turn increasing profits and good interest rates into machinery updates. Statistics show machinery purchases are already on the rise, but repair statistics are taking an interesting turn.
“Machinery depreciation has increased dramatically since 2005, which indicates an increase in purchases of new equipment,” says Gary Schnitkey, Univ. of Illinois professor of farm management.
Farms should continue to trend toward becoming larger scale, more technologically driven operations. "The job is changing," says Gary Schnitkey of the Univ. of Illinois.
He says in 2005 machinery depreciation was at $19 per acre on northern and central Illinois grain farms. In 2009, depreciation hit $33 per acre.
“Usually when depreciation goes up, machinery repair as a whole goes down because newer equipment usually means fewer repairs,” Schnitkey says. “However during that same period, machinery repairs also increased, jumping from $17 per acre in 2005 to $24 per acre in 2009. People are buying new equipment, but the price of repairs is still going up.”
His theory is that technology is driving the deviation from the normal depreciation/repair cost relationship.
“I would expect that servicing of computers and other precision equipment to be highly specialized, requiring dealer service,” Schnitkey says. “Equipment dealers need to be aware of this increased need and be sure to have the specialty technicians required to service machines in a timely fashion. To achieve top yields, equipment can’t be idle when it’s time to plant or spray.”
Keeping specialized staff on hand is both an expense and a potential profit booster. Derrick Markusson of Markusson New Holland in southern Saskatchewan, explained it well when discussing why he added self-propelled sprayers to his dealership.
“Sprayers are a whole new machine for service and repair. You can’t just throw a combine technician out there to fix one,” Markusson says. “There’s constant training from the factory on the product itself for sales and service. And we’ve invested in training technicians on GPS, new software and other technologies twice a year.”
There are also the tools.
“You’re looking at spending at least $250,000 in service trucks, $500,000 in parts and $100,000 in specialty service tools,” he says. “You need to have the facilities, the technicians and enough capital to maintain service vehicles, specialized service tools and to carry a large inventory of parts.
“There are great margins on wholegoods, parts and service. But you need the facilities, parts and dedicated people to make parts and service available 24/7.” The same should apply to other increasingly specialized equipment.
Farmer Costs. For those pushing yields, costs have definitely increased. According to the USDA, seed prices have skyrocketed 146% since 1999 with 64% of that increase occurring in the last 3 years. Fertilizer inputs needed to get maximum yields have proven to be volatile, a trend likely to continue for key nutrients, Schnitkey says.
“Fertilizer and fuel inputs have always been variable and will continue to be so,” Schnitkey says. “Those inputs are necessary to meet the 300-bushel goal, but many of those inputs are in a somewhat limited supply.
“For instance, a lot of the phosphorus and potash mine sources have been tapped in North America. Additional supplies exist in Russia and other places that are potentially politically sensitive. Supply is not guaranteed and price will reflect that.”
Increased pesticide use also is driving input costs. While prices increased only 8.3% in 2007-2008, overall expenses rose 30%.
Those maximizing inputs from machinery and technology investments to fertility to insecticides will, unfortunately, shoulder more risk, too.
“Crop insurance is a risk-management strategy that a lot of farmers use, but increased yields mean increased risk,” Schnitkey says.
He explains that guarantees are based on the previous year’s yield history. “If the previous yield was 200 bushels and the coverage level is 80%, that means the producer is guaranteed 160 bushels and can only have a 40 bushel loss,” he says. “When yields hit 300 at 80% coverage that becomes 240 bushels guaranteed with the potential for a 60 bushel per acre loss.” At $4 per bushel, a crop failure means $240 per acre losses for a 300-bushel producer while those averaging 200 bushels stand to lose only $160 per acre.
“When you handle more money you have a lot further to fall,” Schnitkey says. “You end up incurring more of the risk.”
The happy news, says Fred Below, Univ. of Illinois plant physiologist, is that efficiencies improve as yield increases.
“The nutrients needed to produce a bushel of corn decrease as yield goes up,” he says. “You’re going to need more nutrients per acre, but per bushel the efficiencies are better. It takes more like 0.08 or 0.85 pounds of nitrogen per bushel harvested instead of the standard 1 pound of nitrogen per bushel.”
Future Farmers. Schnitkey says farms should continue to trend toward becoming larger-scale more technologically driven operations.
“The job is changing. It’s going to be more technology and people driven. Those farmers that can manage larger sizes and be savvy about technology are going to excel in the future,” Schnitkey says. “Younger farmers will likely adopt the technology faster.”
He says there will also be more people involved in management decisions.
“You’re going to see a lot more consulting in areas of weakness,” Schnitkey says. “Producers will lean more heavily on crop advisors and specialists. They will need their equipment suppliers to be able to assist them in using precision technology and using data productively.”
For full list of articles from the September 2010 Sourcebook, click here. Or the links below.